Monday, January 8, 2007

Backdating, Steve Jobs, and the Presidential Race

So what does Corporate America's option backdating scandal have to do with the 2008 Presidential race? Well, more that you think, potentially.

The backdating scandal has been gathering momentum in business and legal circles since the middle of 2005, when academic research was published that showed that hundreds, if not thousands, of companies have almost surely manipulated option grants over the past few years. (This week BusinessWeek has a profile on one of the professors, Erik Lie.)

The Wall Street Journal has led coverage of the option scandal, beginning with a front page story entitled "The Perfect Payday," on March 18, 2006:

On a summer day in 2002, shares of Affiliated Computer Services Inc. sank to their lowest level in a year. Oddly, that was good news for Chief Executive Jeffrey Rich.

His annual grant of stock options was dated that day, entitling him to buy stock at that price for years. Had they been dated a week later, when the stock was 27% higher, they'd have been far less rewarding. It was the same through much of Mr. Rich's tenure: In a striking pattern, all six of his stock-option grants from 1995 to 2002 were dated just before a rise in the stock price, often at the bottom of a steep drop.

Just lucky? A Wall Street Journal analysis suggests the odds of this happening by chance are extraordinarily remote -- around one in 300 billion. The odds of winning the multistate Powerball lottery with a $1 ticket are one in 146 million.

Companies involved with backdating have forced many executives and/or directors to resign, including (according to the WSJ, sub. req.) Monster Worldwide, United Health, and Comverse Technologies.

Another company implicated in the scandal: Apple Computer. And after an investigation, the company announced just before the end of the year (in connection with a filing at the SEC), that although CEO Steve Jobs was "aware of or recommended" the dates used for backdating (which included, 6,428 grants of options at Apple on 42 different occasions, and in one instance, a grant made on October 19, 2001 directly to Jobs at "special board meeting" that did not actually take place), no company sanctions would be taken against Jobs.

In the press release on December 29, 2006 (in connection with the filings), a special committee said:

The special committee, its independent counsel and forensic accountants have performed an exhaustive investigation of Apple's stock option granting practices...The board of directors is confident that the Company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team.

The Special Committee of Apple's board is comprised of two individuals: former Vice President Al Gore and financier Jerry York. (Gore joined the Apple Board in March of 2003.)

David Yermack, a finance professor at New York University who has studied options issues, said he was perplexed about directors' expressions of confidence in Mr. Jobs. "They have pretty much admitted that he was directly involved in a fraud," Mr. Yermack said, pointing to Apple's statement that Mr. Jobs "recommended" the selection of favorable grant dates. "If he had directly participated in altering depreciation schedules, or booking revenue that wasn't yet earned, would they have full confidence in him?"

Investigations are on-going, and nothing definitive has been determined. Apple amended earlier filings relating to the option grants, and took a charge of $84M for the period from 1998 to 2006.

Jobs, meanwhile, is one of the most recognized CEOs in America today. Widely credited as being both a technical and marketing genius, since returning to Apple, has he has helped make Apple both a stock market star among Fortune Magazine's "most admired" companies. On the day of the Special Committee's report, the company's stock moved up about 5%.

However, as one commentator noted in the Boston Globe this morning: "'If Steve Jobs were anything other than what he is, he'd already be gone,' said Rob Enderle, principal analyst at Enderle Group, a high-tech research firm. 'There was a crime committed . . . it looks like Steve Jobs was kind of the ringleader.'"

Gore is not currently a candidate for President, although rumors continue to circulate and he continues to have some support in polls (see earlier post.) In addition Gore apparently sent holiday cards to a number of political activists in New Hampshire, inspiring comment on the Blue Hampshire blog. There is certainly a plausible theory that Gore might "make himself available" next fall as a top-tier candidate who is well-known to the Democratic electorate, as an "alternative" to another well-known, potential -- but so-far undeclared -- candidate.

But SEC (and perhaps Justice Department) investigations -- which would likely be in full swing next fall -- may uncover more damaging information about who knew what, and when. And Apple's own filing stated that Jobs "was aware of or recommended" the backdating. Not unlike Martha Stewart, Jobs could be a trophy for an ambitious prosecutor.

Before all is said and done, we may be hearing a lot more about Al Gore's service on Apple's board. Politicians and SEC investigations are not a good combination for the politicians involved (Just ask former Senator and putative-Presidential candidate Bill Frist.) And political writers may be spending more time than they ever imagined poring over Apple's SEC documents, and the meaning of "backdating of stock options."

(One other "small world" note: Affiliated Computer Systems (mentioned in the original WSJ article) apparently hired an outside law firm last year to conduct a separate investigation into its option-granting practices. The firm was Bracewell & Giuliani LLP. And the "Giuliani" in the firm's name? Right, Rudy Guiliani.)